The Fed continues to hike: What next?

As part of an ongoing battle to tame inflation, the Federal Reserve enacted its second consecutive 0.75 percentage point interest rate increase on Wednesday, taking its benchmark rate to a range of 2.25%-2.5%, up from 1.5%- 1.75%, the highest level since December 2018. It was approved unanimously by all members of the committee, a larger consensus than in June, when Kansas City Fed President Esther George dissented, advocating for a smaller hike. 

The new Federal Reserve Monetary Committee (FOMC) statement maintained that inflation remains elevated and that Russia’s war against Ukraine is causing tremendous human and economic hardship, but added for the first time that “recent indicators of spending and production have softened.”

“Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low,” the statement said, using identical language to the previous FOMC statements. 

When asked if the economy was in a recession,  the Fed’s Chairman Jerome Powell said an economic slowdown is the only way to rein in inflation, but reiterated that the US is “not yet in a recession.” However, he recognized that an economic slowdown in the coming months will be needed to tame inflation. 

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“We think it’s necessary to have growth slow down, and growth is going to be slowing this year,” he told the press.

As context, the fed funds rate most directly impacts what banks charge each other for short-term loans, but over time it also feeds into consumer products such as adjustable mortgages, auto loans and credit cards, before trickling down to affect consumer spending.

Stocks hit their highs after the move on Wednesday, as Powell left the door open about Fed’s next move at the September meeting, saying it would depend on the data. Analysts and Fed watchers in particular have dismissed market excitement over these words, and believe there is overwhelming evidence that the Fed is laser focused on crushing inflation. Overall, 10-year yields appear to be pricing in a recession, and the US Treasuries yield curve has flattened. 

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.

In addition to economic reports that will be out this week, including Gross Domestic Product (GDP) and June’s Personal Consumption Expenditure (PCE), many investors are likely to be watching the monthly employment numbers for July (out on August 5) to gauge what the Fed might do next. 

While hiring slightly slowed last month, the U.S. job market has been extremely resilient in the face of waning economic growth, with the unemployment rate steady at 3.6%.  In times of recession, that’s not usually the case.

“What we have right now doesn’t seem like a recession,” Powell said, and specifically referenced positive trends in the labor market, including strong employment numbers to indicate that GDP,  historically a marker of recessions,  might be a less accurate barometer this time.

 “The labor market is just sending such a signal of economic strength that it makes you really question the GDP data,” he added.

Last week data showed that GDP fell 0.9% at an annualized pace for the period, according to the advance estimate, which follows a 1.6% decline from the first quarter. A long-held basic view of recession is that it’s characterized by two consecutive negative GDP readings but the National Bureau of Economic Research, which officially declares recessions, defines it as “ significant decline in economic activity that is spread across the economy and lasts more than a few months.” There’s usually a lag of several months between when the NBER declares a recession and when there’s consecutive negative growth. 

In the broader markets, there’s also ongoing debate about whether the unusual circumstances presented by the pandemic make traditional methods of identifying recessions obsolete. 

While economists debate how these numbers should be interpreted, public markets will most likely continue to struggle for direction amidst a tug of war between inflation and recession. By some accounts, however, they appear to have already bottomed.

Stocks rallying for two consecutive days may signal the onset of a positive turnaround, according to Max Wasserman, senior portfolio manager and founder of Miramar Capital.

Combined with positive earnings from tech giants this week, the surge in the equity market may be investors “breathing a sigh of relief” that the Fed is “done with the aggressive tightening”, Wasserman told CNBC.

“The attitude is basically the Fed is saying we’re near the end, and that the GDP number is telling people there is no compelling reason for the Feel d to hit us with another 0.75 or 1 percentage point,” he added. 

Meanwhile, private markets may benefit from improved investor confidence, in addition to their natural role as a potential volatility hedge. 

Yieldstreet’s private market investment products offer retail investors a potential hedge against these kinds of volatility and opportunities to participate in wealth creation outside traditional public markets. The products often have three-to-five-year terms and aim for higher targeted annualized returns but lack the liquidity of more conventional investments an investor can sell quickly if they worry about declining value.

“When you think about the credit investments, the real estate loans, or some other lending opportunity on the Yieldstreet platform, two things to note. One, the interest rate increases are not going to change how you get paid, versus in the public markets, where interest rate sensitive companies could start to fluctuate heavily or possibly trade downwards, as the result of worry that further interest rate hikes are going to impact them,” Michael Weisz, President of Yieldstreet maintains.

It’s something retail investors may want to consider as they position their portfolios for a future that could include additional rate hikes and continued global uncertainty. 

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